What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-02 compared with 2022-02-09 · 212 added, 249 removed, 400 unchanged (54% of the section changed)

6 unchanged sentences

– Management’s Discussion and Analysis of Financial Condition and Results of Operations” found in our Form 10-K for the year ended December 31, 2021, that was filed with the Securities and Exchange Commission on February 9, 2022.

We are a provider of health care services across the post-acute care continuum, engaged in the ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

We are a provider of health care services across the post-acute care continuum, engaged in the operation, ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

Our operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services.

1 unchanged sentence

Of the 271 facilities, we operated 192 facilities under long-term lease arrangements and have options to purchase 11 of those facilities.

Our real estate portfolio includes 100 owned real estate properties, which included 69 facilities operated and managed by us, 32 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019 (Spin-Off), and the Service Center location.

Of the 32 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that we own and operate.

Our real estate portfolio includes 108 owned real estate properties, which included 79 facilities operated and managed by us, 29 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019, and the Service Center location.

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

Ensign is a holding company with no direct operating assets, employees or revenues.

1 unchanged sentence

In addition, certain of our wholly-owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries.

We also have a wholly owned captive insurance subsidiary (or the Captive Insurance) that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities and our captive real estate trust owns and operates our real estate portfolio.

Our captive real estate investment trust (Standard Bearer REIT) owns and manages our real estate business.

We also have a wholly-owned captive insurance subsidiary that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities and our captive real estate trust owns and operates our real estate portfolio.

Our captive real estate investment trust, Standard Bearer, owns and manages our real estate business.

References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report, are not meant to imply, nor should they be construed as meaning, that The Ensign Group, Inc.

1 unchanged sentence

Recent Activities

Captive Real Estate Investment Trust — On January 1, 2022, we completed our plan to form Standard Bearer REIT.

Standard Bearer REIT is a holding company with subsidiaries that own most of our real estate portfolio.

Operational Update — In 2022, the public health emergency (PHE) was extended several times and was most recently extended through April 11, 2023.

On January 30, 2023, the Biden Administration announced its plan to extend the PHE for a final time to May 11, 2023.

Our primary focus continues to be the health and safety of our patients, residents, employees and their respective families.

We continue to implement measures necessary to provide the safest possible environment within our sites of service, taking into consideration the vulnerable nature of our patients and the unique exposure risks of our staff.

We continue to execute on key initiatives to rebuild occupancy lost due to the pandemic.

During the year, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to 2021.

The improvements in occupancy were due to our operations developing innovative approaches to confront the occupancy declines, including strategic partnerships with upstream and downstream continuum partners and increasing clinical competencies to treat high-acuity patients, including those that are COVID-19 positive.

We believe our operations will continue to gain additional market share as a result of relationships with acute care providers and other health care partners.

During the year ended December 31, 2022 and 2021, we recognized $81.8 million and $75.2 million, respectively, of state relief funding as revenue, including FMAP.

The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with approximately 50% of the deferred amount paid by December 31, 2021 and the remaining 50% by December 31, 2022.

See Note 3, COVID-19 Update in the Notes to the Consolidated Financial Statements.

Captive Real Estate Investment Trust — In January of 2022, we formed Standard Bearer Healthcare REIT, Inc.

or Standard Bearer, a captive REIT.

Standard Bearer is a holding company with subsidiaries that own most of our real estate portfolio.

We expect the REIT structure will allow us to better demonstrate the growing value of our owned real estate and provides us with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties.

We believe this structure will give us new pathways to growth with transactions we would not have considered in the past.

Standard Bearer REIT intends to qualify and elects to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ending December 31, 2022.

The real estate portfolio in Standard Bearer REIT consists of selected 93 of our 100 owned real estate properties.

Of the 93 owned real estate properties in Standard Bearer REIT, 65 facilities are operated by Ensign operating subsidiaries and 30 are leased to and operated by Pennant.

Of the 30 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that we own and operate.

The fair value of Standard Bearer REIT's real estate portfolio is approximately $1.0 billion.

The fair value was determined by a third party independent valuation specialist and incorporated each property's rental income, capitalization rate, rental yield rate and discount rate as appropriate.

On January 1, 2022, as part of the formation of Standard Bearer REIT, certain of our operating subsidiaries and the 65 Standard Bearer REIT subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer REIT Master Leases).

The lease period ranges from 15 to 19 years with three five-year renewal option beyond the initial term, on the same terms and conditions.

The rent structure under the Standard Bearer REIT Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%.

In addition to rent, the operating subsidiaries are required to pay the following:

(1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor);

(2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties;

(3) all insurance required in connection with the leased properties and the business conducted on the leased properties;

(4) all facility maintenance and repair costs;

and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties.

Total annual rental income under the Standard Bearer REIT Master Lease is approximately $54.0 million.

In addition, as we expand our real estate portfolio through our acquisition strategy, we anticipate that the acquired real estate will be included in Standard Bearer REIT.

Standard Bearer REIT has no employees.

Personnel and service provided to Standard Bearer REIT by the Service Center are pursuant to the management agreement between Standard Bearer REIT and the Service Center.

Standard Bearer intends to qualify and elects to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ended December 31, 2022.

During the year ended December 31, 2022, we acquired the real estate of ten skilled nursing facilities, all of which were leased to certain of our operating subsidiaries through the Standard Bearer Master Leases for a purchase price of $84.7 million.

Of the ten, three were previously operated and managed by us.

The resulting real estate portfolio in Standard Bearer consists of a select 103 of our 108 owned real estate properties.

Of the 103 owned real estate properties in Standard Bearer, 75 facilities are operated by Ensign operating subsidiaries and 29 facilities are leased to and operated by Pennant.

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

In addition, as we expand our real estate portfolio through our acquisition strategy, we anticipate that the acquired real estate will be included in Standard Bearer.

As of December 31, 2022, the fair value of Standard Bearer's real estate portfolio is approximately $1.1 billion.

The fair value was determined by a third party independent valuation specialist and incorporated each property's rental income, capitalization rate, rental yield rate and discount rate.

As part of the formation of Standard Bearer, certain of our operating subsidiaries and the Standard Bearer subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer Master Leases).

Total annual rental income under the Standard Bearer Master Lease is approximately $62.5 million.

Standard Bearer has no employees.

Personnel and services provided to Standard Bearer by the Service Center are pursuant to the management agreement between Standard Bearer and the Service Center.

The management agreement provides for a base management fee and an incentive management fee, payable in cash, among other terms.

The base management fee for each applicable period is equal to 5% of the total revenue of Standard Bearer REIT.

The base management fee for each applicable period is equal to 5.0% of the total revenue of Standard Bearer.

The incentive management fee is equal to 5.0% of funds from operations (FFO) and is capped at 1.0% of total revenue.

In addition, operating expenses incurred by the Service Center on Standard Bearer REIT's behalf, which includes the cost of legal, tax, consulting, accounting and other similar services rendered by the Service Center, its advisers or other third parties, are reimbursed by Standard Bearer REIT.

Standard Bearer REIT will obtain its funding through various sources including operating cash flows, access to debt arrangements and intercompany loans.

The intercompany debt arrangements include mortgage loans and a credit revolver between the Ensign Group, Inc., the real estate properties and Standard Bearer REIT and will fund acquisitions and working capital needs.

The interest rate under the credit revolver is a base rate plus a margin ranging from 0.50% to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum.

The intercompany mortgage loan amount is $93.0 million.

is currently no outstanding debt under the intercompany credit revolver.

In addition, as the Department of Housing and Urban Development (HUD) mortgage loans and promissory notes are entered into by our real estate properties, these debts in the aggregate amount of $160.0 million are included in Standard Bearer REIT.

Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and are taking proactive steps designed to protect the health and safety of our residents and employees and to maintain business continuity.

As the vaccines became accessible in all 50 states, we began to see a significant decline in COVID-19 cases in our affiliated operations as we worked diligently to vaccinate all of our willing residents and staff.

While we saw declining COVID-19 cases during the summer of 2021 as a result of vaccination efforts, introductions of variants have caused spikes in the number of COVID cases.

Our primary focus throughout the COVID-19 pandemic has remained ensuring the health and safety of our patients, residents, employees, and their respective families.

During the year, combined Same Facilities and Transitioning Facilities occupancy declined by 0.4% and skilled mix increased by 0.6% compared to 2020.

In 2020, our occupancy, which was at its highest point prior to the pandemic, started to decline in mid-February and continued to decrease to its lowest point in December 2020.

As the vaccine distribution commenced and infection rates began to decline, our occupancy rates started to recover in the first quarter of 2021 and continued throughout 2021.

Additionally, we have seen increases in hospital volumes for surgeries.

Some operations added COVID-19 wings, while others became COVID-19 dedicated facilities, enabling an important offloading of strained hospital capacity.

Even with COVID-19 demands waning, the partnerships developed during the pandemic will continue to benefit us into the future.

More specifically as a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facilities occupancy rebounded by 3.1% and 4.8%, respectively, during the second quarter of 2021 compared to the fourth quarter of 2020.

As the Delta variant and the recent Omicron variant become the dominant form of COVID-19 in the U.S.

and elsewhere, many states and areas in which our communities are located are experiencing new COVID-19 caseloads.

The rise of COVID-19 cases in the third quarter of 2021 and continuing through early 2022 has slowed down our census recoveries.

Our monthly occupancy for Same Facilities and Transitioning Facilities grew 85 basis points from July 2021 to December 2021 after growth had accelerated sequentially by 337 basis points from December 2020 to June 2021.

Occupancy at the end of 2021 has recovered 53.8% from the lowest point in 2020.

W e expect sequential monthly occupancy to again grow starting in the first quarter of 2022, but at a slightly more moderated rate.

By strengthening existing partnerships, creating new partnerships and most importantly, demonstrating clinical capabilities and favorable outcomes, our census has continued to stabilize.

We believe our operations are primed to rebuild occupancies and continue to gain additional market share as a result of relationships with acute care providers and other health care partners.

During the year ended December 31, 2021, we received approximately $11.6 million in provider relief fund distributions (Provider Relief Fund) from the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) from the federal government.

To date, we have returned all Provider Relief Funds that we received.

Further, in March 2021, we repaid the remaining $102.0 million of Medicare Accelerated and Advance Payment Program funds.

On September 10, 2021, HHS made an additional round of $17.0 billion in Provider Relief Fund available to support healthcare-related expenses or lost revenue attributable to COVID-19.

We have not received any funding related to the additional round of Provider Relief Fund distributions.

During the year ended December 31, 2021 and 2020, we received state relief funding of $70.5 million and $51.9 million and recognized $75.2 million and $45.4 million, respectively, as revenue.

Our unapplied state funding as of December 31, 2021 and 2020 was $1.8 million and $6.5 million, respectively.

See Note 3, COVID-19 Update in the Notes to the Consolidated Financial Statements.

The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due by December 31, 2021 and the remaining 50% due by December 31, 2022.

We recorded $48.3 million of deferred payments of social security taxes as a liability in 2020, of which $24.2 million was paid out in the fourth quarter of 2021 and the remaining liabilities will be paid in the fourth quarter of 2022.

Until the COVID-19 pandemic has been resolved as a public health crisis, it has the potential to cause further and more severe disruption of the global and national economies.

Despite these challenges, we believe we are well-positioned to operate effectively in the current environment.

Our forecasted metrics may be modified as the pace of the recovery in our volumes and costs of services and supplies become clearer over the coming months.

We continue to focus on navigating the challenges presented by COVID-19 through utilizing the infrastructure of our local operational approach.

Each location is partnering with its local leaders and community outreach to ensure the operations are well equipped to deliver quality care.

Consistent with previous hurdles, our local leaders are adjusting their operation to meet the clinical and financial challenges, including utilizing the expertise of our Service Center resources to implement best practices.

HUD Mortgage Loans — During the year ended December 31, 2021, four of our subsidiaries entered into HUD mortgage loans in the aggregate amount of approximately $45.0 million.

The mortgage loans are insured with HUD, which subjects these subsidiaries to HUD oversight and periodic inspections.

Loan proceeds were used to fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.

Common Stock Repurchase Program — On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on October 29, 2021.

During the year ended December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $10.1 million.

Subsequent to December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $9.9 million.

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on February 10, 2022.

In addition, operating expenses incurred by the Service Center on Standard Bearer's behalf, which includes the cost of legal, tax, consulting, accounting and other similar services rendered by the Service Center, its advisers or other third parties, are reimbursed by Standard Bearer.

During the year ended December 31, 2022, the Service Center management fee was $4.4 million, which represents 6% of total Standard Bearer rental revenue.

Standard Bearer will obtain its funding through various sources including operating cash flows, access to debt arrangements and intercompany loans.

The intercompany debt arrangements include mortgage loans and the Revolving Credit Facility to fund acquisitions and working capital needs.

As part of the Amended Credit Agreement discussed in Note 16, Debt , the interest rates applicable to loans under the Revolving Credit Facility were amended, such that the rates are, at the Company's option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum.

During the year ended December 31, 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $0.1 million.

These preferred shares were fully vested at the time of the contributions by the shareholders.

In addition, as part of the formation of Standard Bearer in January of 2022, we established the Standard Bearer Healthcare REIT, Inc.

2022 Omnibus Incentive Plan (Standard Bearer Equity Plan).

In 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $6.5 million.

We did not grant any stock options nor restricted shares during the year ended December 31, 2022.

During the year ended December 31, 2022, Standard Bearer met the requirement to distribute to its shareholders at least 90% of its annual taxable income through a declaration and payment of cash dividends totaling $30.4 million.

Of that amount, $30.1 million was paid in the form of a distribution to the Company and $0.3 million was paid in the form of a distribution to noncontrolling interests.

Revolving Credit Facility Amendment — On April 8, 2022, we entered into the Second Amendment to the Third Amended and Restated Credit Facility (such agreement, the Amended Credit Agreement, and the revolving credit facility thereunder, the Revolving Credit Facility), which increased the Revolving Credit Facility by $250.0 million to an aggregate principal amount of up to $600.0 million.

Pursuant to the Amended Credit Agreement, the Company transitioned from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) as the applicable reference rate for borrowings under the Revolving Credit Facility.

The maturity date of the Amended Credit Facility is April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist Securities (Truist).

The interest rates applicable to loans under the Revolving Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the Amended Credit Agreement).

In addition, we will pay a commitment fee on the unused portion of the commitments, which will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

As part of the amendment, deferred financing costs of $0.6 million were written off and additional deferred financing costs of $3.2 million were capitalized during the year ended December 31, 2022.

Common Stock Repurchase Program — On July 28, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from August 2, 2022.

We did not purchase any shares pursuant to this stock repurchase program in the year ended December 31, 2022.

On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from February 10, 2022.

In the second quarter of 2022, we repurchased 0.3 million shares of our common stock for $20.0 million.

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

Key Performance Indicators

We manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance.

Revenue associated with these metrics is generated based on contractually agreed-upon amounts or rate, excluding the estimates of variable consideration under the revenue recognition standard, ASC 606.

These indicators and their definitions include the following:

22 unchanged sentences

Occupancy — We define occupancy derived from our skilled services as the ratio of actual patient days (one patient day equals one patient occupying one bed for one day) during any measurement period to the number of beds in facilities which are available for occupancy during the measurement period.

The number of licensed beds in a skilled nursing facility that are actually operational and available for occupancy may be less than the total official licensed bed capacity.

The number of beds in a skilled nursing facility that are actually operational and available for occupancy may be less than the total official licensed bed capacity.

This sometimes occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapy treatment space or other desirable uses calculated to improve service offerings and/or operational efficiencies in a facility.

10 unchanged sentences

We have two reportable segments:

(1) skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) real estate, which is comprised of properties owned by us and leased to skilled nursing and assisted living operations, including our own operating subsidiaries and third party operators, and are subject to triple-net long-term leases.

We also reported an “all other” category that includes operating results from our senior living operations, mobile diagnostics, transportation and other ancillary operations.

Our senior living, mobile diagnostics, transportation and other ancillary operations businesses are neither significant individually, nor in aggregate and therefore do not constitute a reportable segment.

(1) skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) Standard Bearer, which is comprised of select properties owned by us through our captive REIT and leased to skilled nursing and senior living operations, including our own operating subsidiaries and third party operators.

We also reported an “all other” category that includes operating results from our senior living operations, mobile diagnostics, transportation, other real estate and other ancillary operations.

These businesses are neither significant individually, nor in aggregate and therefore do not constitute a reportable segment.

Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the operating segment level.

4 unchanged sentences

We are participating in supplemental payment programs in various states that provide supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts.

Several of our operating subsidiaries entered into transactions with several such hospital districts providing for the transfer of

the licenses for those skilled nursing facilities to the hospital districts.

Numerous operating subsidiaries entered into transactions with various hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts.

Each affected operating subsidiary agreement between the hospital district and our subsidiary is terminable by either party to fully restore the prior license status.

Standard Bearer

We generate rental revenue primarily by leasing post-acute care properties we acquired to healthcare operators under triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the property, including property taxes, insurance and maintenance and repair costs, subject to certain exceptions.

As of December 31, 2021, our real estate portfolio comprised of 100 real estate properties.

Of these properties, 69 are leased to affiliated skilled nursing facilities wholly owned and managed by us, 32 are leased to senior living operations wholly owned and managed by Pennant and our Service Center property, which is leased to our Service Center and numerous third parties for commercial office space.

Of the 32 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

As of December 31, 2022, our real estate portfolio within Standard Bearer is comprised of 103 real estate properties.

Of these properties, 75 are leased to affiliated skilled nursing facilities wholly-owned and managed by us and 29 are leased to senior living operations wholly-owned and managed by Pennant.

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

During the year ended December 31, 2022, we generated rental revenues of $72.9 million, of which $58.0 million was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid payors or through other state-specific programs.

In addition, we hold majority membership interests in our other ancillary operations.

In addition, we hold majority membership interests in certain of our other ancillary operations.

Payment for these services varies and is based upon the service provided.

1 unchanged sentence

Primary Components of Expense

Cost of Services (exclusive of rent and depreciation and amortization shown separately).

Our cost of services represents the costs of operating our operating subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients.

Cost of Services (exclusive of rent and depreciation and amortization shown separately) — Our cost of services represents the costs of operating our operating subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients.

Cost of services also includes the cost of general and professional liability insurance, rent expenses related to leasing our operational facilities that are not included in facility rent - cost of services, and other general cost of services with respect to our operations.

Facility Rent - Cost of Services.

Rent - cost of services consists solely of base minimum rent amounts payable under lease agreements to third-party real estate owners.

Facility Rent - Cost of Services — Rent - cost of services consists solely of base minimum rent amounts payable under lease agreements to third-party real estate owners.

Our operating subsidiaries lease and operate but do not own the underlying real estate and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements.

Expenses related to leasing our operations other than rent are included in cost of services.

General and Administrative Expense.

General and administrative expense consists primarily of payroll and related benefits and travel expenses for our Service Center personnel, including training and other operational support.

Expenses related to leasing our operations are included in cost of services.

General and Administrative Expense — General and administrative expense consists primarily of payroll and related benefits and travel expenses for our Service Center personnel, including training and other operational support.

General and administrative expense also includes professional fees (including accounting and legal fees), costs relating to our information systems and stock-based compensation related to our Service Center employees.

Depreciation and Amortization.

Property and equipment are recorded at their original historical cost.

Depreciation and Amortization — Property and equipment are recorded at their original historical cost.

Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets.

7 unchanged sentences

The preparation of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant

judgments and estimates on the part of management.

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management.

For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

5 unchanged sentences

Self-insurance for general and professional liability — The self-insured retention and deductible limits for general and professional liability for all states are self-insured through our wholly owned captive insurance subsidiary (the Captive Insurance), the related assets and liabilities of which are included in the accompanying consolidated balance sheets.

Our general and professional liability as of December 31, 2021 and 2020 was $69.7 million and $60.9 million, respectively.

Our general and professional liability as of the years ended December 31, 2022 and 2021 was $87.0 million and $69.7 million, respectively.

Our policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported.

5 unchanged sentences

Our results serve as a strong indicator that our strategy is working and our transformation is underway.

As vaccines became available in the communities we serve, we began to see a recovery in our census during the first quarter of 2021, which has improved throughout 2021.

Despite the emergence of COVID-19 variants in late 2021, which has led to spikes in COVID-19 caseloads and slowed down our census recoveries starting in the beginning of the third quarter of 2021, we continue to experience healthy growth in both revenue and operational earnings.

Our net revenue for the year ended December 31, 2021 continued to be impacted by COVID-19.

The Emergency Waivers issued by CMS, including a waiver of the requirement to have a three-day stay in a hospital to get Medicare coverage of a skilled nursing stay as well as the authorization of renewed skilled nursing facility coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their skilled nursing facility benefits, continued into 2021 and remain in effect at the beginning of 2022.

In addition, we continued to receive state relief funding in selected states, which has been designed to enhance reimbursement to provide additional funding to cover COVID-19 related expenses.

For the year ended December 31, 2021, we recorded state relief revenue of $75.2 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

Since 2018, our total revenue increased $1.3 billion, or 72.4%, representing a 14.6% compound annual growth rate (CAGR) while our diluted GAAP earning per share (EPS) from continued operations grew by $2.86 from 2018 to $3.95, representing a 38.0% CAGR.

Over the past year, we have continued to make progress on targeted initiatives, including our foundational structure of local operations that are the centers of excellence in the communities they serve.

As part of this focus, we have been able to expand our relationships with doctors, hospitals and managed care plans.

Revenue from our skilled services collectively increased by 10.3%.

We have also strengthened our collection process and identified non-clinical areas where we can manage spending.

These operational fundamentals coupled with the reduction of interest expense due to the deferral of payroll tax payments and cash generated from strong fiscal year performance.

Our total revenue for the year ended December 31, 2022 increased $398.0 million, or 15.1%, while our diluted GAAP earning per share grew by 15.5%, from $3.42 to $3.95, compared to the year ended December 31, 2021.

Over the past year, we have continued to make progress on targeted initiatives related to increasing occupancy and hiring and developing our people.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to 2021.

We saw a recovery in our census starting in the first quarter of 2021, which has continued throughout 2022.

Despite the emergence of COVID-19 variants and subvariants throughout 2022, we continue to experience healthy growth in both revenue and operational earnings.

We also added over 4,000 team members, or 16%, to our operating subsidiaries and the Service Center.

Our net revenue for the year ended December 31, 2022 continued to be impacted by COVID-19, with the continual evolution of COVID-19 variants and subvariants in 2022.

Accordingly, we continued to receive state relief funding in selected states, which have been designed to provide additional funding to cover COVID-19 related expenses.

For the year ended December 31, 2022, we recorded state relief revenue of $81.8 million, which directly offsets against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

Additionally, we continue to seek out opportunities to expand our operations and real estate, adding 29 new operations and ten real estate properties, three of which we previously operated, during the year ended December 31, 2022.

We remain confident that our operating model will continue to allow each operator to form their own market-specific strategy and to adjust to the needs of their local medical communities, including methods for attracting new healthcare professionals into our workforce and retaining and developing existing staff.

We are excited to be adding new operations in several geographies.

These transitions will take time, particularly given the continued labor pressures, but with each new operation we are creating new opportunities for the next generation of leaders and look forward to working together to help each operation reach its enormous clinical and financial potential.

The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated:

22 unchanged sentences

Skilled services $ 408,732 $ 373,603

Real estate (2)

Standard Bearer (2)

27,871 31,876

3 unchanged sentences

Adjusted EBITDA 383,570 336,572

FFO for real estate segment $ 55,712 $ 49,541

Valuation Metric

FFO for Standard Bearer

49,484 49,434

VALUATION METRICS

Adjusted EBITDAR $ 536,619

(1) Segment income represents operating results of the reportable segments excluding gain and loss on sale of assets, impairment charges and provision for income taxes.

(1) Segment income represents operating results of the reportable segments excluding gain and loss on sale of assets, real estate insurance recoveries and losses, impairment charges and provision for income taxes.

Included in segment income for Standard Bearer for the year ended December 31, 2022 are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense.

Segment income is reconciled to the Consolidated Statement of Income in Note 8, Business Segments in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

(2) Real estate segment income includes rental revenue from Ensign affiliated tenants and related expenses.

(2) Standard Bearer segment income includes rental revenue from Ensign affiliated tenants and related expenses.

The following discussion includes references to EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Funds from Operations (FFO) which are non-GAAP financial measures (collectively, the Non-GAAP Financial Measures).

4 unchanged sentences

We believe the presentation of certain Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding our results of operations because:

• they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired;

• they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as other expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired;

• they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

7 unchanged sentences

We use certain Non-GAAP Financial Measures to compare the operating performance of each operation.

These measures are useful in this regard because they do not include such costs as net interest expense, income taxes, depreciation and amortization expense, which may vary from period-to-period depending upon various factors, including the method used to finance operations, the amount of debt that we have incurred, whether an operation is owned or leased, the date of acquisition of a facility or business, and the tax law of the state in which a business unit operates.

These measures are useful in this regard because they do not include such costs as other expense, income taxes, depreciation and amortization expense, which may vary from period-to-period depending upon various factors, including the method used to finance operations, the amount of debt that we have incurred, whether an operation is owned or leased, the date of acquisition of a facility or business, and the tax law of the state in which a business unit operates.

We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of Adjusted EBITDAR targets.

4 unchanged sentences

• they do not reflect changes in, or cash requirements for, our working capital needs;

• they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

• they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

• they do not reflect rent expenses, which are necessary to operate our leased operations, in the case of Adjusted EBITDAR;

6 unchanged sentences

These Non-GAAP Financial Measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP.

We strongly urge you to review the reconciliation of income from operations to the Non-GAAP Financial Measures in the table below, along with our consolidated financial statements and related notes included elsewhere in this document.

We strongly urge you to review the reconciliation of income from operations to the Non-GAAP Financial Measures in the table below, along with our unaudited consolidated financial statements and related notes included elsewhere in this document.

We use the following Non-GAAP financial measures that we believe are useful to investors as key valuation and operating performance measures:

1 unchanged sentence

We believe EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our asset base (depreciation and amortization expense) from our operating results.

We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before (a) interest expense, net, (b) provision for income taxes, and (c) depreciation and amortization.

We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before (a) other expense, net, (b) provision for income taxes, and (c) depreciation and amortization.

Adjusted EBITDA

3 unchanged sentences

• stock-based compensation expense;

• costs incurred related to real estate due diligence;

• business interruption gain;

• results related to operations not at full capacity;

• gain on sale of assets;

• real estate transactions and other related costs;

• legal finding;

• acquisition related costs;

• costs incurred related to new systems implementation;

• results related to operations not at full capacity;

• gain on sale of assets and business interruptions recoveries.

Funds from Operations (FFO)

We consider FFO to be a useful supplemental measure of the operating performance of our real estate segment.

We consider FFO to be a useful supplemental measure of the operating performance of Standard Bearer.

Historical cost accounting for real estate assets in accordance with U.S.

2 unchanged sentences

In response, the National Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for REITs, which excludes historical cost depreciation from net income.

We define (in accordance with the definition used by NAREIT) FFO to consist of real estate segment income, excluding depreciation and amortization related to real estate, gains or losses from sales of real estate, insurance recoveries related to real estate and impairment of depreciable real estate assets.

We define (in accordance with the definition used by NAREIT) FFO to consist of Standard Bearer segment income, excluding depreciation and amortization related to real estate, gains or losses from the sale of real estate, insurance recoveries related to real estate and impairment of depreciable real estate assets.

VALUATION MEASURE

3 unchanged sentences

Adjusted EBITDAR is a financial valuation measure that is not specified in GAAP.

This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense.

This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense, and is therefore presented only for the current period.

The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.

7 unchanged sentences

Net income $ 224,652 $ 197,725

net income attributable to noncontrolling interests 3,073 886

Interest expense, net 2,461 5,549

net (loss) income attributable to noncontrolling interests

Other expense, net 7,736 2,461

Provision for income taxes

64,437 60,279

Depreciation and amortization 62,355 55,985

1 unchanged sentence

Stock-based compensation 22,720 18,678

Legal, transactional and other costs(a) 5,689 —

Business interruptions gain and gain on sale of assets (2,365) —

Real estate transactions and other related costs(a)

Legal finding(b)

Gain on sale of assets and business interruptions recoveries

(4,380) (2,365)

Results related to operations not at full capacity — 585

Acquisition related costs(b) 384 104

Acquisition related costs(c)

Costs incurred related to new systems implementation

5 unchanged sentences

Adjusted EBITDAR $ 536,619

(a) Legal, transactional and other costs incurred related to the formation of Standard Bearer REIT and other real estate related activities.

(b) Costs incurred to acquire operations which are not capitalizable.

(a) Real estate transactions and other related costs include costs incurred related to the formation of Standard Bearer and other real estate related activities.

(b) Legal finding against our non-emergent transportation subsidiary.

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

1 unchanged sentence

Year Ended December 31, 2022

Skilled services Real estate All Other (1)

Eliminations Consolidated

Skilled Services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 2,906,215 $ 72,937 $ 122,610 $ (76,294) $ 3,025,468

3 unchanged sentences

Income before provision for income taxes $ 289,089

(1) General and administrative expense is included in the "all other" category.

(2) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries related to real estate properties and impairment charges from operations.

Year Ended December 31, 2021

Skilled services Real estate All Other (1)

Eliminations Consolidated

Skilled Services Standard Bearer All Other Eliminations Consolidated

Total revenue $ 2,523,234 $ 58,127 $ 102,685 $ (56,585) $ 2,627,461

1 unchanged sentence

Segment income (loss) 373,603 31,876 (147,915) — 257,564

Loss from sale of real estate and impairment charges (2)

Gain from sale of real estate

Income before provision for income taxes $ 258,004

(1) General and administrative expense is included in the "all other" category.

(2) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries related to real estate properties and impairment charges from operations.

Our total revenue increased $398.0 million, or 15.1%, compared to the year ended December 31, 2021.

The increase in revenue from same facility and transitioning operations was primarily driven by the increase in skilled service revenue per patient day, along with the impact of acquisitions.

The increase in revenue was primarily driven by an increase in occupancy from our skilled services operations along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to January 1, 2022 increased our consolidated revenue by $123.9 million during the year ended December 31, 2022, when compared to the same period in 2021.

In addition, we recorded $75.2 million of state relief revenue during the year ended in 2021 compared to $45.4 million in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

In addition, we recorded $81.8 million of state relief revenue during the year ended in 2022 compared to $75.2 million in 2021, which directly correlated to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

47 unchanged sentences

Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment.

In the first half of 2021, we converted two campuses into two skilled nursing facilities.

In 2022, we converted three skilled nursing facilities into campuses.

(1) Same Facility results represent all facilities purchased prior to January 1, 2019.

1 unchanged sentence

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2021.

S killed services revenue increased $235.1 million, or 10.3%, compared to the year ended December 31, 2020.

The primary changes were from increases in managed care revenue of $89.6 million or 24.4%, Medicaid custodial revenue of $120.1 million or 13.5%, other skilled revenue of $22.9 million or 15.3%, and private and other payors revenue increased by $2.7 million, or 1.7%.

Medicare revenue remained consistent from the prior year.

The increase in revenue was primarily driven by strong performance across our skilled services operations.

The negative impact of COVID-19 on our census started in mid-February 2020 and continued into the first quarter of 2021.

Census began to recover in the second quarter of 2021 and continued throughout 2021.

Our consolidated occupancy decreased by 0.7%, which includes operations acquired at lower occupancy, compared to the same period in the prior year.

Consolidated patient days increased due to transitioning and newly acquired operations.

The decline in consolidated occupancy was offset by the increase in average daily revenue rates and skilled days due to a shift in higher acuity.

As COVID-19 cases decline, we have experienced a recovery in our census, which includes the return of our long-term care patients.

This has a direct impact on our skilled days percentage as our long-term care patient days continue to climb and make up a higher percentage of the total patient days.

Our ancillary revenue services also increased by 37.9%.

Revenue in our Same Facilities increased $80.0 million, or 4.2% due to higher average daily revenue rates due to a shift toward higher acuity patients, offset by the decrease in occupancy of 0.5%, which primarily declined in the first three months in 2021 and has steadily increased since April 2021.

The decline in our occupancy is mainly in our non-skilled patient days, which was offset by the shift toward higher acuity patients.

Total revenue for Same Facilities included $58.4 million and $37.2 million of Medicaid revenue related to state relief funding for the years ended December 31, 2021 and 2020, respectively.

Managed care revenue increased by $63.0 million or 19.8%, driven by increases in managed care days as our partnership with various managed care organizations, hospitals and the local communities strengthened.

Revenue generated by our Transitioning Facilities increased $30.7 million, or 9.1%, primarily due to increases in our daily rate and skilled mix days compared to the year ended December 31, 2020 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

In addition, we experienced a shift toward higher acuity patients as our skilled days increased by 10.1% .

Skilled services revenue increased $383.0 million, or 15.2%, compared to the year ended December 31, 2021.

Of the $383.0 million increase, the primary changes were from increases in M edicaid custodial revenue of $151.2 million, or 15.0%, Medicare revenue of $105.1 million, or 14.4%, managed care revenue of $69.0 million, or 15.1%, private revenue of $29.6 million, or 18.5% and Medicaid skilled revenue of $28.1 million, or 16.3%.

The increase in skilled services revenue was primarily driven by strong performance across our existing skilled services operations as our census continued to recover in fiscal year 2022 and the impact of operation expansions in 2022.

Our consolidated occupancy increased by 2.5% and our skilled nursing days increased by 0.1% compared to 2021.

Revenue in our Same Facilities increased $152.6 million, or 7.3%, compared to 2021, due to increases in occupancy and skilled mix.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 2.5% to 76.4%.

Managed care and Medicare skilled days increased by 6.4% and 5.5%, respectively, coupled with an increase in our skilled revenue daily rate of 2.3%, resulting in an increase in skilled mix revenue.

Revenue generated by our Transitioning Facilities increased $44.7 million, or 13.3%, primarily due to improved occupancy growth of 5.5% and an increase in skilled mix days of 1.4%, compared to 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled mix revenue increased by 1.1%, mainly from the increases in m anaged care and Medicare days of 22.3% and 8.6%, respectively, coupled with an increase in our skilled revenue daily rate of 1.7%.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $185.8 million compared to the year ended December 31, 2021.

We acquired 17 operations between January 1, 2021 and December 31, 2021 across five states.

The increases are primarily due to the expansion of 24 operations between January 1, 2022 and December 31, 2022 across six states.

In the future, if we acquire additional facilities that are underperforming and need to be turned around or invest in start-up operations, we expect to see lower occupancy rates and skilled mix and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio.

4 unchanged sentences

2022 2021 2022 2021 2022 2021 2022 2021

Skilled Nursing Average Daily

Revenue Rates:

SKILLED NURSING AVERAGE DAILY REVENUE RATES

Medicare $ 693.31 $ 687.26 $ 690.20 $ 681.34 $ 675.96 $ 707.03 $ 691.25 $ 687.18

5 unchanged sentences

Total skilled nursing revenue

(1) These rates exclude additional Federal Medical Assistance Percentages (FMAP) we recognized and include sequestration reversal of 2%.

$ 374.97 $ 360.80 $ 335.41 $ 320.95 $ 324.40 $ 330.88 $ 363.97 $ 353.79

(1) These rates exclude additional FMAP and other state relief funding and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022 and the year ended December 31, 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.9% and 1.3%, respectively, compared to the year ended December 31, 2021.

The increase is attributable to the 1.2% net market basket increase that became effective in October 2021 coupled with our continued shift towards higher acuity patients.

Included in revenue for the year ended December 31, 2021 is the twelve-month impact of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through April 1, 2022.

Revenue for the year ended December 31, 2020 included eight months of impact from the temporary suspension of the 2% Medicare sequestration.

The increase is attributable to the 2.7% net market basket increase that became effective in October 2022 offset by the removal of sequestration suspension.

In 2022, Medicare daily rates includes three months of sequestration suspension of 1%, three months of sequestration suspension of 2% and six months of no sequestration suspension compared to the sequestration suspension of 2% that was in place for the entire year of 2021.

Our average Medicaid rates increased 3.7% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

Medicaid rates exclude the amount of state relief revenue we recorded.

Payor Sources as a Percentage of Skilled Nursing Services.

We use our skilled mix as a measure of the quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods.

Payor Sources as a Percentage of Skilled Nursing Services — We use our skilled mix as a measure of the quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods.

The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:

27 unchanged sentences

Revenue percentage 78.0 % 77.1 % 0.9 %

Cost of services related to our skilled services segment increased $174.1 million, or 9.8%, due primarily to additional costs at new acquisitions, which accounted for $97.1 million of the increase.

Cost of services as a percentage of revenue decreased by 0.3% to 77.1%.

We experienced a decrease in cost associated with operational improvements.

Real Estate Segment

Cost of services related to our skilled services segment increased by $323.2 million, or 16.6%, due to additional costs at new operation expansions, which accounted for $147.7 million of the increase to cost of services.

The remaining increases are mainly due to higher staffing expenses.

As the result of COVID-19 variants, our operations experienced staffing constraints due to isolation requirements and COVID-19 exposure, which resulted in additional overtime, benefits and bonuses to our staff as well as higher use of contracted labor.

The increase in labor costs is offset by cost management in non-clinical expenses.

Cost of services as a percentage of revenue increased to 78.0% from 77.1%.

Standard Bearer

Year Ended December 31, Change

2022 2021 $ %

(Dollars in thousands)

Rental revenue generated from third-party tenants $ 14,970 13,962 $ 1,008 7.2 %

4 unchanged sentences

FFO $ 49,484 $ 49,434 $ 50 0.1 %

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.3 million, or 7.0% to $65.5 million, compared to the year ended December 31, 2020.

The increase in revenue is primarily attributable to acquisitions and CPI increases.

Our FFO increased $6.2 million, or 12.5% to $55.7 million, compared to the year ended December 31, 2020.

The increase in FFO is primarily related to the increase in rental revenue and the decrease in interest expense.

All Other Service Revenue

Our other revenue decreased by $11.0 million, or 11.1% to $88.2 million, compared to the year ended December 31, 2020.

Other revenue for 2021 includes senior living revenue of $48.4 million and revenue from other ancillary services of $39.8 million.

The decrease in revenue is due to the impact of COVID-19, which negatively impacted services in our other ancillary services.

Rental revenue — Standard Bearer's rental revenue, including revenue generated from our affiliated facilities, increased by $14.8 million, or 25.5% to $72.9 million, compared to the year ended December 31, 2021.

The increase in revenue is primarily attributable to ten real estate purchases as well as annual rent increases since the year ended December 31, 2021.

Segment income — Standard Bearer's segment income decreased by 12.6% to $27.9 million, compared to the year ended December 31, 2021.

The decrease is primarily attributable to increases in interest expense as a result of intercompany debt arrangements used to fund real estate acquisitions, management fee expense associated with the intercompany agreements between Standard Bearer and the Service Center and depreciation and amortization offset by increases in rental revenue as a result of the real estate acquisitions.

FFO — Standard Bearer's FFO increased by 0.1% to $49.5 million, compared to the year ended December 31, 2021.

The increase is similar to the change in segment income with the exclusion of depreciation and amortization.

Excluding the expenses entered into in 2022, FFO increased by 26.4%.

All Other Revenue

Our other revenue increased by $19.9 million, or 19.4% to $122.6 million, compared to the year ended December 31, 2021.

Other revenue for 2022 includes senior living revenue of $67.4 million and revenue from other ancillary services of $47.8 million and rental income of $7.4 million.

The increase in other revenue is attributable to our senior living operation expansions in 2022.

Consolidated Financial Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.1% to 5.3%, primarily due to the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

General and administrative expense increased $22.0 million or 17.0%, to $151.8 million.

This increase was primarily due to increases in wages and benefits due to enhanced performance and growth, as well as expenses incurred related to the formation of Standard Bearer REIT of $5.7 million.

General and administrative expense increased by 0.4% to 5.8%, as a percentage of revenue.

Depreciation and amortization .

Depreciation and amortization expense increased $1.4 million, or 2.6%, to $56.0 million.

Rent — cost of services — Our rent — cost of services as a percentage of total revenue decreased by 0.2% to 5.1%, primarily due to the growth in revenue outpacing the increase in rent expense and as our operation expansions include the acquisition of the related real estate properties.

General and administrative expense — General and administrative expense increased $7.0 million or 4.6%, to $158.8 million.

This increase was primarily due to increases in wages and benefits due to enhanced performance and growth.

General and administrative expense as a percentage of revenue decreased by 0.6% to 5.2%, which demonstrates our refocused efforts on non-clinical spend management.

Depreciation and amortization — Depreciation and amortization expense increased $6.4 million, or 11.4%, to $62.4 million.

This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations.

Depreciation and amortization decreased 0.2%, to 2.1%, as a percentage of revenue.

Other expense, net.

Other expense, net as a percentage of revenue decreased by 0.1%, to 0.1%.

Other expense primarily includes interest expense related to borrowings under mortgage debt.

As there was no outstanding debt under the Credit Facility, interest expense decreased.

Provision for income taxes.

Our effective tax rate was 23.4% for the year ended December 31, 2021, compared to 21.3% for the same period in 2020.

Depreciation and amortization remained consistent at 2.1%, as a percentage of revenue.

Other expense, net — Other expense, net as a percentage of revenue increased by 0.2%, to 0.3%.

Other expense primarily includes interest expense related to our debt and gain or loss on the deferred compensation investments.

During the year ended December 31, 2022, we recorded a loss on those investments of $4.2 million compared to a gain of $1.6 million during the year ended December 31, 2021.

There is an offsetting income and offsetting expense split between cost of services and general and administrative expenses in 2022 and 2021, respectively.

Provision for income taxes — Our effective tax rate was 22.3% for the year ended December 31, 2022, compared to 23.4% for the same period in 2021.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses.

1 unchanged sentence

Liquidity and Capital Resources

Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real property and our Credit Facility.

Our liquidity as of December 31, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds and deferral of the employer portion of social security taxes.

Historically, we have primarily financed the majority of our acquisitions through the financing of our operating subsidiaries through mortgages, our Credit Facility, and cash generated from operations.

Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real property and our Revolving Credit Facility.

Our liquidity as of December 31, 2022 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

Historically, we have primarily financed the majority of our acquisitions through mortgages on our properties, our Revolving Credit Facility and cash generated from operations.

Cash paid to fund acquisitions was $101.1 million and $104.1 million for the years ended December 2022 and 2021, respectively.

1 unchanged sentence

We currently have approximately $80.0 million budgeted for renovation projects for 2023.

We believe our current cash balances, our cash flow from operations and the amounts available under our Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.

We believe our current cash balances, our cash flow from operations and the amounts available for borrowing under our Revolving Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.

We may, in the future, seek to raise additional capital to fund growth, capital renovations, operations and other business activities, but such additional capital may not be available on acceptable terms, on a timely basis, or at all.

1 unchanged sentence

Treasury bill related investments.

In addition, as of December 31, 2021, we held debt security investments of approximately $50.3 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of December 31, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

In addition, as of December 31, 2022, we held investments of approximately $83.1 million.

We believe our investments that were in an unrealized loss position as of December 31, 2022 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.

As mentioned above, our primary sources of cash is from our ongoing operations.

1 unchanged sentence

We currently anticipate that existing cash and total investments as of December 31, 2022, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on October 29, 2021.

During the year ended December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $10.1 million.

Subsequent to December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $9.9 million.

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

The share repurchase programs do not obligate us to acquire any specific number of shares.

Under these programs, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

On July 28, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from August 2, 2022.

Under this program, we are authorized to repurchase our issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws.

The Company did not purchase any shares pursuant to this stock repurchase program in the year ended December 31, 2022.

The share repurchase program does not obligate us to acquire any specific number of shares.

Under this program, we were authorized to repurchase our issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws.

During the second quarter of 2022, we repurchased approximately 0.3 million shares of our common stock for $20.0 million.

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from October 29, 2021.

During the first quarter of 2022, we repurchased approximately 0.1 million shares of our common stock for $9.9 million.

During the fourth quarter of 2021, we repurchased 0.1 million shares of our common stock for $10.1 million.

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

The following table presents selected data from our consolidated statement of cash flows for the periods presented:

10 unchanged sentences

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities.

The $97.7 million decrease in cash provided by operating activities for the year ended December 31, 2021 compared to the same period in 2020, w as primarily due to changes in working capital partially offset by higher net income.

Changes in working capital was driven by a payment on the deferred employer portion of social security taxes in December 2021, timing of accounts receivable collections and payment of income taxes and expenses.

The $3.2 million decrease in cash provided by operating activities for the year ended December 31, 2022 compared to the same period in 2021 w as primarily due to changes in working capital offset by higher net income.

Changes in working capital were driven by timing of collections of accounts receivable and accrued wages and related liabilities.

Investing Activities

Investing cash flows consist primarily of capital expenditures, investment activities, insurance proceeds and cash used for acquisitions.

The $115.2 million increase in cash used in investing activities for the year ended December 31, 2021, compared to the same period in 2020, was primarily due to an increase in cash used for acquisitions and capital expenditures of $93.1 million and $19.2 million, respectively, which are partially offset by an increase in cash from insurance proceeds of $6.1 million.

The $12.3 million increase in cash used in investing activities for the year ended December 31, 2022 compared to the same period in 2021, was primarily due to an increase in cash used for expansions and capital expenditures of $15.0 million partially offset by sale of assets.

Financing Activities

Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of shares of common stock through employee equity incentive plans.

The $61.2 million decrease in cash used in financing activities for the year ended December 31, 2021, compared to the same period in 2020, was primarily due to the proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds offset by net borrowing activity.

A discussion of our cash flows for the year ended December 31, 2019 is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, included in our

Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 3, 2021.

Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, payment for share repurchases, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of subsidiary shares.

The $43.9 million decrease in cash used in financing activities for the year ended December 31, 2022 compared to the same period in 2021, was primarily due to $102.0 million of net repayments of the Medicare Accelerated and Advance Payment Program funds in 2021 and $6.7 million receipt of proceeds from the sale of preferred shares and common stock of Standard Bearer in 2022.

This is offset by $19.8 million of share repurchases as part of our stock repurchase program in 2022 and $45.2 million in proceeds from HUD borrowings in the same period in 2021, that did not recur in 2022.

A discussion of our cash flows for the year ended December 31, 2020 is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources , included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 9, 2022.

Material cash requirements from known contractual and other obligations

Total long-term debt obligations, net of debt discount, outstanding as of the end of each fiscal year were as follows:

Total long-term debt obligations outstanding as of the end of each fiscal year were as follows:

2022 2021 2020 2019 2018

12 unchanged sentences

Credit Facility with a Lending Consortium Arranged by Truist

We maintain the Credit Facility with a lending consortium arranged by Truist, which includes a revolving line of credit of up to $350.0 million in aggregate principal amount.

The maturity date of the Credit Facility is October 1, 2024.

The interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.50% to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement).

In addition, we pay a commitment fee on the unused portion of the commitments that ranges from 0.25% to 0.45% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

As of December 31, 2021, we had approximately $6.7 million on the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit, which is a reduction of $0.9 million from 2020.

Subsequent to December 31, 2021, we amended our Credit Facility to include Standard Bearer REIT as a co-borrower.

All existing terms and conditions remained the same.

As of December 31, 2021, and February 4, 2022, there was no outstanding debt under the Credit Facility.

On April 8, 2022, we entered into the Amended Credit Agreement, which increased the amount of the revolving line of credit thereunder to $600.0 million in aggregate principal amount.

The maturity date of the Revolving Credit Facility is April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist.

In addition, we will pay a commitment fee on the unused portion of the commitments that will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

Mortgage Loans and Promissory Notes

During the year ended December 31, 2021, four of our subsidiaries entered into HUD mortgage loans in the aggregate amount of $45.0 million.

As a result, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $156.6 million, as of December 31, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates range of 3.1% to 4.2%, including fixed interest rates range of 2.4% to 3.3% per annum.

As of December 31, 2022, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $153.5 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates at a range of 3.1% to 4.2%, including fixed interest rates at a range of 2.4% to 3.3% per annum.

Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment.

For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by 3% in the fourth year of the loan, and reduced by 1% per year for years five through ten of the loan.

For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by 3% in the fourth year of the loan, and is reduced by 1% per year for years five through ten of the loan.

There is no prepayment penalty after year ten.

1 unchanged sentence

In addition to the HUD mortgage loans above, we have two promissory notes.

The notes bear fixed interest rates of 5.0% and 5.3% per annum and the term of the notes are ten months and 12 years, respectively.

The notes bear fixed interest rates of 6.3% and 5.3% per annum and the term of the notes are 10 months and 12 years, respectively.

The 12 year note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

Operating Leases

During the fiscal year of 2021, 176 of our facilities are under long-term lease arrangements, of which 94 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

As of December 31, 2022, 192 of our facilities are under long-term lease arrangements, of which 96 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

The Master Leases consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography.

4 unchanged sentences

Additionally, four of the 97 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024.

In the second quarter of 2021, the Company added four operations and extended the term for one of the Master Leases for an additional 15 years.

In the third quarter of 2021, we also added two operations and extended the term for one of the Master Leases for an additional 17 years.

As a result, the total lease liabilities and right-of-use assets increased by $54.7 million and $63.4 million, respectively, to reflect the new lease obligations.

We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

1 unchanged sentence

Most of these leases contain renewal options, certain of which involve rent increases.

Forty-three of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under eight separate master lease arrangements.

Fifty-eight of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under ten separate master lease arrangements.

Under these master leases, a breach at a single facility could subject one or more of the other affiliated facilities covered by the same master lease to the same default risk.

16 unchanged sentences

These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.

Labor and supply expenses make up a substantial portion of our cost of services.

Labor, supply expenses and capital expenditures make up a substantial portion of our cost of services.

Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace.

To date, we have generally been able

to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses.

To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses.

There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis